Saturday, 18 November 2017

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How Banking Systems Originally Started


What is a banking system? It feels like a simple question. But, based on where you sit along with your own personal perspective there can be a number of distinct answers.
When I pose this question to individuals in my courses I invariably receive a response that deals exclusively with a computerized procedure. In the modern jargon the term "system" seems to automatically consult with a computer and a pc only.
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Nevertheless a "system" is bigger than only a computer. A "system" is a grouping or combination of things or parts forming a complex or unitary whole. An easily recognized example is that the postal system including things such as letters, stamps, parcels, letter boxes, post offices, sorting offices, computers, clerks, mailmen, delivery vans, airlines; only to mention some of its own components. It is how all this is organised and made to function making it worthy of this title "postal system". So, when we talk of a system, we speak of something much larger and more complex than the computerized portion of that program.

The same logic relates to any other "system" and "banking systems" are not any different.
The cheque clearing system (or check clearing system to our American cousins) can probably lay claim to the honor of being the oldest banking system on earth. This system, together with variations, is used for the very day in all countries where the cheque still forms a portion of the national payment system.

Now in the twenty first century, in the majority of nations in which the cheque is still in use, the cheque clearing system is an extremely sophisticated process utilizing state of the art technology, readers, sorters, scanners, coded cheques, electronic graphics and lots and lots of computing power.
The cheque is basically a modest piece of paper, an instruction to your bank to create a payment. The narrative of the cheque clearing system is a narrative that is worth telling. It's that story of a banking system that is presently in its third century of operation. It is the story of a banking system which has evolved and changed and been enhanced through countless innovations and changes. It is a story of the vital payment instrument that has helped grease the wheels of trade and business.

How did the cheque begin? Most probably in ancient times. There is discussion of cheque-like instruments from the Roman empire, from India and Persia, dating back two millennia or more.

The cheque is a written order handled by means of an account holder, the "drawer", to her or his bank, to pay a specific sum to the payee (also known as the "drawee"). The cheque is a payment instrument, meaning that it is the actual vehicle by which a payment can be obtained from 1 account and moved to another account. A cheque has a legal personality - it is a negotiable instrument regulated in most states by legislation.

To illustrate let's use an illustration. Your Aunt Sally provides you a gift for the birthday. A cheque for one hundred pounds. To get a hold of your actual present (the cash that is) you've got two options. You can take yourself off to Aunt Sally's lender and maintain payment in cash by presenting the cheque on your own, or you could provide the cheque into your own bank and ask them to collect the amount on your behalf.

Collecting your present in person can be a real bind, especially if Aunt Sally lives in another city, miles away from where you live. So that you deposit your cheque with your bank.

Cheque clearing is the process (or method) which is used to find the cheque that Aunt Sally gave you for your birthday, out of your bank branch, in which you deposited it, to Aunt Sally's bank branch and to find payoff for the amount due back to your own branch. Given that about any one day millions and millions of cheques are processed, sorted, processed, transported; obtaining payment for and keeping tabs on each of these things is not a simple feat.

A year or two ago the annual number of cheques processed in the United Kingdom was just over five million. Not per year but PER DAY!

But, we're digressing. We need to contact our story, today unfolding nearly two and a half centuries past. Until roughly 1770 the collection of cheques in London, which by then had already become the world's premier banking centre, was pretty much a everyday, tedious affair. Each afternoon clerks from each one of the dozens of London banks would set out with a leather bag tucked under their arms. From the bags were the cheques which was deposited with their banks drawn on all of the other London banks.

They would trudge from 1 lender to the other, through rain and through sand, in winter and summer. At every bank they'd present the cheques which had been deposited with them for collection and would get in exchange cash payment for those items presented. When necessary they would also take delivery of cheques drawn on themselves and deposited in these other banks, keeping a tally of balances between them and the other bank until they settled with each other. This dull exhausting trudge from one bank to another would often take the best part of each afternoon. On their return the cash received in payment of these cheques are balanced up. Life was really hard.

And then it occurred! A spark of innovation flashed across the mind of one of those weary clerks. Who it was, is not known, however he had a true brainwave, probably driven by ideas of the way to boost his leisure time or settle his nerves using that additional pint of ale.

The logic was simple. If the clerks could all meet in a set time in a single location, they could transact their business, each with another in a portion of the time and without the need to walk miles and miles to heaps of banks. They began doing this by arranging to meet daily at the Five Bells, a tavern in Lombard Street in the City of London, to exchange all their cheques in one location and settle the balances in cash. In the spirit of the efficiency gained they could maximise their leisure and drinking time - that they promptly did, much to the gratification of the local publican. An added benefit was that all this now occurred from this cold and the wet and the gloom.

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